Delta Air Lines’ recently announced decision to base frequent flyer rewards on dollars spent rather than miles traveled is a better, more customer-centric way to distribute product benefits, says Wharton marketing professor Peter Fader. When it comes to customer value, Fader notes, “one of the rubrics we celebrate is the notion of RFM — recency, frequency [and] monetary value. [It makes sense to] reward customers on that basis.” With just 4% of Delta’s customers accounting for 25% of revenues, the choice seems clear — if overdue — Fader explains in this Knowledge@Wharton interview.

An edited transcript of the conversation follows.

Knowledge@Wharton: You have written a book (Customer Centricity: Focus on the Right Customers for Strategic Advantage) about the concept of customer centricity that is very relevant to Delta’s recent decision. Can you describe how the theory of customer centricity relates to the current state of the airline industry and what Delta, in particular, is doing today?

Peter Fader: The airline industry is interesting because in many ways, air carriers brought out many of the aspects of customer centricity earlier and perhaps better than any other industry. On the heels of the industry being deregulated in the 1970s and right through to the 1980s, we have the airline industry to thank — or blame — for everything from dynamic pricing to loyalty programs as we know them today. They did some amazingly progressive things. A lot of people can’t even imagine a time without the plethora of loyalty programs that we have today, but they are a relatively recent innovation.

It was very risky on the part of the airlines to take on all these liabilities, build that infrastructure and come up with all of these incentives for people to use the programs. So lots of credit to the airlines — Delta included, of course — for making all this happen. But then, it all kind of stagnated. They started with some really amazing practices; [however,] those practices haven’t changed in the 30 years since the companies first instituted them. The kind of move that Delta is making here makes total sense, and it should have happened years earlier. It’s a shame that it has taken so long for the major airlines to realize that dollars matter more than miles.

Knowledge@Wharton: Briefly explain what customer centricity is and how it relates to what Delta has done here.

Fader: In my book, customer centricity is about the recognition of the differences across your customers. There is no single average customer; there is this wide variety of them, and they vary not only in their needs and what they want from a relationship with a company, but they also vary in terms of their value to the firm. It’s imperative for the firm to figure out who the most valuable customers are, to start taking on tactics to create more value, to extract some of that value for their shareholders, to find more customers who resemble the valuable ones … and bend over backwards to bring them in….

[Customer centricity is] a celebration of differences, as opposed to, “Let’s figure out what the average customer wants.” And loyalty programs are a great way for customers to self-select and [for firms] to provide those kinds of rewards and extract that value. And again, the airlines have been good about developing those programs, but they haven’t been really progressive about changing them [based on] our changing understanding of customers and the needs of a company and its shareholders.

Knowledge@Wharton: So, it makes sense for an airline to want to reward its best customers, with “best” meaning the ones from whom they get the most revenues? That also means that some customers are going to be less well off, right? Who are the winners and losers when a company takes this kind of approach?

Fader: I don’t like to think that there would be losers; I do like to think about winners. I’m not saying this just to be politically correct — I don’t want companies to be “firing” customers and I don’t want companies to … treat [customers] badly. The problem is that today, there are so many companies out there — not including the airlines, for the most part — that are treating too many customers too well…. But, some customers deserve better treatment, and that should be decided on the basis of what they’re worth to the firm.

[Delta's announcement] is a step in the right direction.… I think that the incentives associated with an airline loyalty program have been a bit out of whack by rewarding people for miles instead of dollars. So, it’s not so much giving people less; it’s giving them more what they deserve.

Knowledge@Wharton: It might be that under the new Delta program, the ultimate beneficiary would be a frequent flyer who takes a lot of short trips and does them on short notice because of business or other reasons. So, they’re paying top dollar for their fares; they are not getting any discounts by reserving way in advance. And they’re not getting many miles because they’re just flying maybe an hour or so away.

On the other hand, there is the bargain shopper who is buying tickets for the cross continental flights at bargain rates. Maybe they do that a couple of times a year and they amass lots of miles from those few trips. Under the new policy, they may not be losers, but they are not going to get quite the level of benefits that they have had in the past. So, it’s a redistribution of the benefits.

Fader: That is correct. And while it might be disappointing to those who are getting a little bit less than they got before, it’s hard for them to complain about it. That is, they will complain about it, but it’s hard to feel a great deal of sympathy for them.

The structures of the program, the way that they were previously set up, were a little artificial, a little bit out of whack, so this is just a recalibrating of programs in an appropriate way. I don’t see this as an example of a company chiseling away and taking away from its customers. I think it is just a fair distribution, and it really does make sense. If you think about the principles or the metrics that are associated with customer value, one of the rubrics that we celebrate is the notion of RMF: recency, frequency [and] monetary value. Let’s reward customers on that basis. Someone who is flying infrequently, and just taking that occasional big flight and often not paying a lot for it, isn’t worth as much as someone who is taking a lot of short fights very often and, indeed, paying top dollar for them. It makes all the sense in the world, and it’s hard to make an argument to the contrary, other than sheer inertia.

Knowledge@Wharton: Is there sometimes a conflict — it seems like there would be — between providing good customer service overall and customer centricity?

Fader: Companies need to be more selective about who gets that red carpet treatment, and this is actually one area where the airlines have been pretty good — which is to say, most people get treated [okay]. It is those consumers who get the upgrades, who get other kinds of benefits that the airline might offer, who are getting that special treatment. And again, that should be on the basis of what the customer is worth.